Alibaba Is Long Overdue for a Bounce

The recovery out of the pandemic for most major tech stocks has been extraordinary. Companies like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL,(NASDAQ:GOOG)) are breaking records. Meanwhile Alibaba (NYSE:BABA) stock is almost back to the starting gate.

Alibaba Stock
Source: Nopparat Khokthong / Shutterstock.com

This is not a true tell on how well the company is doing, or in this case, how badly. BABA stock is suffering because of political pressure from the local authorities. It is down almost 40% from it highs. What’s worse is that it hasn’t found a bottom yet. Every attempt by the bulls to stem the slide has failed. It showed promise late June, but that ended because last week it made lower lows than May.

Fundamentally, Alibaba is still an astonishingly strong company. None other can raise revenue in one day like it does. Last year during a pandemic, they delivered $74 billion on their “Singles” one day event. Earnings strength like this does not deserve the treatment the stock is receiving on Wall Street.

BABA Stock Has Regulatory Problems

There is a perfect storm facing the company from several angles. Politically it’s co-founder and former CEO Jack Ma got the company in hot water. He made some antagonistic comments toward the Chinese system. Since then, the government has pursued policies that are harsh on the company and the people who run it.

The iShares China Large-Cap ETF (NYSEARCA:FXI) shows that the problem is not just with BABA stock. The entire ETF is also down more than 20% in just since February. Baidu (NASDAQ:BIDU) and JD.com (NASDAQ:JD) stocks are also in the same mess as Alibaba. In fact, BIDU is down 15% points more than BABA. Eventually these great companies will find a bottom, but for now they are falling knives.

There is extra worry from the fact that this is happening while the whole stock market will not stop rallying. If BABA stock cannot do well in a rising market then it will certainly struggle on the way down. Stocks have never been stronger because of the current tailwinds.

The U.S. stimulus and the Federal Reserve’s extremely bullish policies are lifting all equity prices. Arguably they are also causing tremendous inflation. Therefore coming out of this ideal bullish scenario might eventually be painful. We are also drawing closer to the ebbing process. The odds of a correction are high, though not necessarily imminent.

The window for a bounce in BABA stock is closing. I have had good successes catching this knife and it should work again this time. But I would caution against opening full-size positions. There is strong support above $180 per share, so the disaster scenario from here would bring a bargain opportunity.

There Is Support Below

Alibaba (BABA) Stock Chart Showing Support below
Source: Charts by TradingView

Ideally, I would use the options markets where I can build big safety margin. For example, instead of risking $205 to buy shares, I would sell October $180 put options. For this I collect almost $6, so there is no out-of-pocket expense. This could make me long the stock lower and break near $174 per share.

Compare that with today’s buyers who would already be down almost 15% when I break even. Selling puts is not for everyone, but it is worth investigating. I don’t even need a rally to win.

Active traders have are several entry and exit points between $198 and $231. Not all investors are fast enough to do so short term. In the end, buying good stocks at reasonable levels makes better sense.

BABA Stock and Risk

Regardless the method, investors have to account for the overall market risks. Stocks don’t trade in a vacuum.

If even when BABA finds footing, if the markets corrects, it will foil the bounce. Therefore, conviction is automatically lower than it should be under normal circumstances. Regardless of the decision, caution is a wise decision at this point.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Nicolas Chahine is the managing director of SellSpreads.com.


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